Bunds rise as growth worries mount after US vote

Bunds rallied on Wednesday as the fiscal challenges facing President Barack Obama after his re-election fueled worries about global growth and euro zone data showed the region still struggling.

There was demand at sale of five-year German debt but appetite was below this year' average with investors put off by the low yields on offer.

President Barack Obama won a second term in the White House after scoring clear victories across the country but Republicans remained in control of the House of Representative.

Congress therefore still faces a deep partisan divide as it deals with $US600 billion of spending cuts and tax increases that will be enacted next year, unless agreement over reducing the US budget deficit is reached.

The "fiscal cliff" threatens to send the United States back into recession and this threat was keeping safe-haven assets underpinned, analysts said..

Data on Wednesday showed German output slid by more than forecast in September, while the European Commision said the euro zone economy will barely grow next year.

"The whole situation in Congress is unchanged so people are worried about how to deal with the fiscal cliff. That's very much what drives safe-haven (demand) here," David Schnautz, rate strategist at Commerzbank said.

German Bund futures hit a two month high of 142.88 and saw a settlement close of 142.75, up 66 ticks on the day.

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That pushed 10-year German bond yields 6 basis points lower to 1.377, with the US Treasury equivalent down 11 basis points at 1.63 per cent. In the secondary market five-year German yields shed 6 bps to 0.38 per cent.

The October 2017 bond was sold at an average yield of 0.42 per cent at the auction, below the 0.53 per cent at a similar sale on October 10 and an average of 0.63 per cent at 5-year bond sales so far this year.

It drew bids worth 1.5 times the amount allotted to investors, compared with 2.2 times last month and an average of 2.01 at this year's auctions.

"It's not bad demand given that the five-year now is not as cheap as it was a few months ago," Alessandro Giansanti, rate strategist at ING said.

"It shows that even if there has been some rally in the periphery, the situation is still not totally clear and investors prefer to keep some position in the core."

In Greece, tens of thousands shouting anti-government slogans flooded into the main square before parliament on Wednesday, in a show of anger against lawmakers due to narrowly pass an austerity package to win aid from lenders and avoid bankruptcy..

Spanish bonds came under slight pressure one day before the country sells €3.5 to €4.5 billion of bonds including a new 5-year bond and 20-year debt - the longest dated issue to be sold at an auction since mid-2011.

"We expect only a small portion of the overall size to be allocated to this maturity," Schnautz added.

Having completed some 95 per cent of its funding so far this year, Spain is considered to be in a comfortable position and some say funding pressure will only pile up on the sovereign next year - when it may be forced to seek formal help which would trigger European Central Bank support.

Much of the volatility that allows "fast money" accounts like hedge funds to make profits has died down since the ECB said in September said it would buy the bonds of euro zone countries that asked for financial help.